PADINI: Profit Growth Driven by Cost Savings, Investment Bank Raises Target Price and Recommends Buy

Performance Review

A leading retailer has reported first-quarter earnings for FY26 that largely met market expectations, driven by significant quarter-on-quarter profit growth. The positive performance has prompted RHB Investment Bank Bhd to upgrade its recommendation to “BUY” from “Neutral,” maintaining a target price of MYR2.16. This target price suggests an upside of 20.0% from the last traded price of MYR1.80, with the valuation incorporating a 2% ESG premium.

For the first quarter of FY26, the company recorded a core net profit of MYR21 million. While this represented a slight year-on-year decline of 1.8%, it marked a robust 98% increase quarter-on-quarter, aligning with approximately 12% of both the investment bank’s and consensus full-year forecasts. Revenue for the quarter rose 2% year-on-year to MYR401.1 million, partly attributed to new store openings.

Drivers of Profitability

The improved profitability was primarily a result of enhanced cost efficiencies and a favorable product mix. Gross Profit Margin (GPM) expanded by 4.3 percentage points year-on-year to 39.9%, also benefiting from positive foreign exchange movements. The EBITDA margin saw a 3.3 percentage point increase year-on-year to 19.2%, spurred by the GPM expansion and reduced administrative expenses. On a quarter-on-quarter basis, core profit surged 98%, supported by a 2% rise in sales, an 8% uplift in GPM, and an 8% reduction in selling and distribution costs. The company’s strategy of offering value-for-money products and maintaining strong brand equity proved effective in sustaining shopper demand amid a cautious consumer spending environment.

Future Outlook and Risks

Looking ahead, the company anticipates near-term sales to improve, buoyed by the seasonally stronger period, including upcoming festive seasons and school holidays. Despite a softening in discretionary spending, demand for affordable fashion is expected to remain resilient as consumers gravitate towards value alternatives. The potential resurgence of tourism, particularly with Visit Malaysia Year 2026, is also expected to contribute positively. A stronger Malaysian Ringgit is projected to ease sourcing costs, thereby supporting gross margins, which are expected to remain around 39% as rental costs stabilize. While geopolitical tensions in border regions like Thailand-Cambodia could pose a risk, the impact is viewed as limited given Malaysia’s sales dominance, accounting for approximately 97% of FY25 sales. The investment bank expects seasonal uplift to underpin stronger earnings in the second and third quarters.

The target price of MYR2.16 implies a 12.2x FY27F P/E, which is consistent with the historical mean. Key risks to this outlook include sharp escalations in operating costs and a further decline in consumer sentiment.